Failure of Corporate Governance in Tesco PLC

7014CLS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................4
Overview of the Case Scenario..............................................................................................4
Failure of Corporate Governance...........................................................................................4
Reasons Behind Corporate Governance Failure in Tesco PLC..............................................5
Criminal Liability of a Corporation in Failure of Corporate Governance..............................6
Models and Principles of Good Corporate Governance.........................................................8
The Corporate and Governmental Responses to this Scandal and Also the Legal Issues
Involved..................................................................................................................................9
Propose Certain Solutions to Avoid Such types of Failures in Corporate Governance in Future
..............................................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
The Corporate governance is basically the combinations of various rules, regulations
and other laws which needs to be followed so that a business can carry on its activities and
manage all these in a smooth and efficient manner. As due to various scams & scandals in the
corporate world in the recent few years corporate governance has gained importance in a
significant manner. The main reason behind the failure of corporate governance is that the higher
authorities of the company does not give much attention which creates a complex situation for
shareholders & stakeholders and the betterment and growth of the company hindered. The
situation of corporate governance arise when there is imbalance between the operations of the
company and interests of shareholders & stakeholders of the organisation.
There are various scandals concerning failure of corporate governance and one of those is
of Tesco Plc in the year 2014 in which their accounting department has done a scandal, which is
the one of the most crucial example in the recent era. This was a failure of corporate governance
because it was overstating it profit which lead to the business coming under the scanner of
regulatory authority. Here the researcher will try to focus upon Tesco PLC's failure of corporate
governance highlighting its reasons and what all legal issues were posed.
MAIN BODY
Overview of the Case Scenario
In 2014 there was a scandal disclosed in the Tesco PLC which set an important instance
of the failure of corporate governance1. It also lead to suspending the four senior most directors
of the company. In this it was found that the Tesco PLC was showing more profits than its actual
profit in its accounting statement by £250m. The company has showed the profit of amount
£1.1bn whereas the actual profit was of £263m. This overstating of the profit was done for the
purpose so that the people and shareholders gets attracted to the company which will lead to the
increase in the investment by them. After this scandal came into limelight the Board of Directors
and other authorities took the matter seriously. After this the fine of £500m was imposed upon
the Tesco PLC and many investors has filed the case against the company on the ground of fraud
1 Luigi Zingales, Corporate Governance (2017).

committed by Tesco PLC by claiming that this overstating of profit has been done to obtain
funds and increase the investment in the company.
Failure of Corporate Governance
Tesco PLC is such a business organisation which is considered as having the best system
of corporate governance. Also its image in the eyes of people is also very good because it is also
a leading firm which contributes to the Social Corporate Responsibility and take care of safety
measures and also works in such a way so that environment can be protected. However the
scandal which took place in the year 2014 was a shocking one and it was one of the most crucial
case of failure in the corporate governance in such a big firm2. Because of the disclosure of this
scandal the company has suffered in the term of its reputation in the eyes of general public. Due
to this failure of corporate governance in the Tesco PLC many employees were suspended as
they were actively involved in the scandal including four senior most directors of the
organisation. Due to this failure the Tesco PLC as well as its Audit Committee were also
inspected and it came under the purview of consideration. There were various reasons because of
which this business organisation has faced this failure in its corporate governance which is
discussed further.
Reasons Behind Corporate Governance Failure in Tesco PLC3
In every company there are various similar reasons because of which the corporate governance
fails. The main reasons because of this failure happens are actions of the company, negligence by
the directors of the company upon the management. These reasons individually as well as
collectively lead to the failure of corporate governance which lead to the financial as well as
ethical failures in the corporation. The following are the reasons for each company leading to the
failure of the corporate governance:
 Incompetent Management.
 Regulations and procedures established for internal regulations are not followed.
 Risk Management has been paid very less attention.
 Lack of defining the duties and responsibilities.
 The audit of the corporation is inefficient
2 Indrajit Dube, 'Is Corporate Governance The Answer To Corporate Structural Failure?' [2018] SSRN
Electronic Journal.
3 A.M.I. Lakshan and W.M.H.N. Wijekoon, 'Corporate Governance And Corporate Failure' (2015) 2
Procedia Economics and Finance.